With the Fed’s successful attempts to boost the stock and bond markets using quantitative easing (buying government bonds with printed money) they have increasingly taken on the role of a guarantor of the asset values of stocks and bonds.

Given the Fed’s power to print money, such guarantees can be very powerful and have had clearly positive effects on many markets.

So, if the Fed has done such a good job with stocks and bonds over the past couple years, why doesn’t it do something to guarantee the asset values of housing? It could simply announce that it will start buying foreclosures from banks. When the housing market recovers, it will then sell the homes back into the market. This would be similar to what it is doing with bonds. Buy now to boost the market during the downturn and sell them back in when the economy recovers.

Just announcing such a program would have a positive effect on the housing market and immediately increase housing prices and reduce foreclosures. Sounds like all positives to me.

The Fed could even do the same for the stock market. It could announce a plan to start buying the S&P index — what a boost to the market just the announcement would be, much less when they actually start buying stocks. Imagine what a boost to the economy that would be. This would truly start to drive down unemployment. When combined with a big boost to the housing market, the economy could soar.

Again, as the economy gets through this downturn the Fed could sell the stock back into the inevitable upturn, just like it’s planning to do with all the bonds it is buying. This would be a perfect system that virtually guarantees that asset values won’t fall. What a boost to investor confidence that would be!

Of course, I’m just kidding. This is all nonsense. It assumes that whatever price assets are at now is their true market price because it assumes the Fed can always sell them later at the current price or above and not take a loss.

It also assumes the Fed can sell these assets fairly quickly. If not, then all the printed money they are using to buy these assets will become inflation. Yes, that’s just nonsense. But, that is the same logic the Fed is using to boost stock and bond values now when it buys trillions of dollars worth of bonds. It is nonsense too for the same reasons.

More interestingly, why has the Fed become so focused on preserving asset values. Isn’t that the job of the market — to determine the market prices of stocks and bonds?

Of course it is, but when asset values are determined by asset bubbles, they will inevitably fall. That’s not a problem if it’s one asset bubble — Florida land or Internet stocks. But, if the bubbles are all part of a multi-bubble economy and when one pops it puts pressure on the others potentially bringing the whole economy down, then that’s a problem.

And, that’s why the Fed is acting as the guarantor of asset values. In its own silent way, it is showing tremendous concern that we have a multi-bubble economy and that, contagion as they call it, can be deadly.

The problem is that Fed intervention to boost asset values will not succeed in the end. Instead it just postpones the natural market adjustment of asset values. So, when the adjustment finally happens, it will be much more severe. And, it will be accompanied by the massive inflation the Fed has created in the process.

It’s a game we would know well if we saw it from anyone other than the Fed. Because it is being played by the Fed many people are hoping beyond hope that it will work. It won’t.


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